How Are Mortgage Rates Determined? Understanding Why Your Rate Might Be Higher Than Advertised

Looking to buy a home? You might have noticed that mortgage rates can vary. Maybe you’ve seen an enticing rate advertised online or heard about the average national rate, but when you apply for your own mortgage, the rate you’re qualified for is different.

It’s helpful to think of advertised mortgage rates like the starting price for a new car. While that base price looks appealing on commercials, your final price depends on several specific factors. The same goes for mortgage rates. They’re personalized based on your financial situation and current market conditions, which is why your mortgage rate might be different from what you see advertised.

Advertised vs. actual mortgage rates

When you see mortgage rates advertised, they’re typically the “best-case scenario” rates. You’ll often notice phrases like “rates as low as” or “rates starting at” with these advertisements—your clue that these are baseline rates. 

Advertised rates are usually based on an ideal borrower: someone with excellent credit, a large down payment and very little debt compared to their income. Here’s what that ideal borrower profile typically looks like:

• A credit score of 740 or higher 
• A down payment of 30% or more
• A loan amount that fits within conventional loan limits
• A single-family home that will be their primary residence

Even if you have great credit, your actual rate might be different because of factors unique to your situation. For example, maybe you’re making a 10% down payment instead of 20%, or you’re buying a condo instead of a single-family home. Each of these factors can affect your final rate.

Interest rate vs. APR: What’s the difference?

Before diving deeper into the factors that affect mortgage rates, let’s clear up a common source of confusion. When looking at mortgage offers, buyers will see two different rates, which are shown below.

Though often conflated, buyers would be savvy to remember these distinctions when applying for a mortgage to avoid locking in a less-than-ideal rate.

How are mortgage rates determined?

If you’ve been watching mortgage rates, you’ve probably noticed they change often. The rate you see advertised one day might not be available the next. This movement isn’t random; it’s influenced by several variables, including economic conditions and financial markets. 

Factors that affect your mortgage rate

Your personal mortgage rate is determined both by those factors you can control and those you can’t. Let’s look at what you can control first:

• Credit score. Your credit score is one of the most important factors in determining mortgage rates. Higher credit scores typically earn lower rates because they show lenders you have a strong history of managing debt responsibly.
• Down payment. A larger down payment can help you secure a better rate. When you put more money down upfront, mortgage lenders may see you as a lower-risk borrower because you have more equity in the home from the start.
• Loan amount. The size of your loan can affect your rate. Large loan amounts (jumbo mortgages) might come with different rates than conforming loan amounts.
• Property type. The type of property you’re buying matters. Single-family homes typically receive better rates than condos, multi-unit properties and manufactured homes.

Why are mortgage rates so high?

Today’s mortgage rates reflect broader economic conditions that affect the entire housing market. Understanding these factors can help you make sense of current mortgage rates—and make more informed decisions about your home purchase:

• Inflation. When inflation rises, mortgage rates typically follow. This happens because lenders need to ensure the money they’ll receive in future payments will maintain its purchasing power. Higher inflation often leads to higher mortgage rates to offset the decreased value of future mortgage payments.
• Economics. The overall health of the economy plays an important role in mortgage rate trends. Strong economic growth often increases rates, while economic uncertainty can cause rates to fluctuate.
• The housing market. The balance between housing supply and demand can influence mortgage rates. When the housing market is particularly active, rates may adjust to help balance supply and demand.
• Treasury bonds. The yield on 10-year Treasury bonds is closely linked to mortgage rates. Higher yields on these bonds tend to correlate with elevated mortgage rates.
• Competition. Different lenders may offer different rates based on their business goals and appetite for mortgage lending. That’s why it’s worth exploring options with multiple lenders.

Are mortgage rates the same across all lenders?

Mortgage rates can vary significantly between lenders. Each lender sets their own rates based on their business goals, operating costs and how many loans they want to process. That’s why shopping around for your mortgage could save you money over the life of your loan. 

Some of the reasons mortgage rates differ between lenders include:

• Different overhead costs and profit margins
• The types of loans they specialize in
• Their current capacity to process loans
• Local market competition

Do mortgage lenders match rates? Should I negotiate?

Many lenders are willing to compete for your business, so negotiating your mortgage rate is both common and smart. Here’s how to approach the process:

• Get multiple loan estimates. Start by requesting loan estimates from 3-5 different lenders. These official documents make it easy to compare offers side by side. Pay attention to the interest rate, APR and closing costs as some lenders might offer a lower rate but charge higher fees.
• Use competition to your advantage. If you get a better rate from one lender but prefer working with another, don’t be shy about letting them know. Lenders may match or even beat a competitor’s offer to earn your business.
• Look at the full package. Consider the entire lending package, not just the rate. Some lenders might offer faster closing times, lower fees, better customer service, rate lock options or special programs for first-time homebuyers. Different types of mortgage loans, such as fixed-rate and adjustable-rate mortgages, may also come with varying rates and terms.

Strategies for a lower mortgage rate

Getting the best possible mortgage rate takes some planning, but the long-term savings make it worth the effort. Here are several proven strategies that could help you get a better rate.

Consider discount points

One way to lower your interest rate—and your monthly payment—is by purchasing discount points. Think of discount points as a way to prepay interest upfront in exchange for a lower rate over the life of your loan. Each point costs 1% of your loan amount. For example, if you’re borrowing $300,000, one point would cost $3,000. By purchasing discount points, you can reduce your interest payments over the life of the loan.

Improve your credit score

Your credit score has significant bearing on the mortgage rates you qualify for. Focus on paying all bills on time and reducing credit card balances. It’s best to avoid applying for new credit before getting your mortgage. Take time to review your credit report and fix any errors you find as these could affect your score.

Save for a larger down payment

A larger down payment can help you secure a better mortgage interest rate, lowering your borrowing costs. This is because it helps reduce the lender’s risk. While a 20% down payment is ideal, many loan programs accept less. However, putting more money down could help you avoid private mortgage insurance (PMI), qualify for better rates and enjoy lower monthly payments. What’s more, some lenders don’t require PMI on loan products regardless of your down payment amount.

Manage your credit profile

Managing your credit profile is important to securing the best mortgage rate—lenders will examine your credit history for the past 2 years. Review your credit before applying so there are no surprises. Also consider your debt-to-income ratio, which could be a factor when seeking an approval.

Focus on paying down existing debts and avoid taking on new debt during the mortgage process. Consider paying off or consolidating high-interest credit cards and hold off on major purchases until after your mortgage loan closes.

Navy Federal can help you get a great mortgage loan

Getting a mortgage is an exciting step toward becoming a homeowner, and understanding your rate is an important part of that journey. The experienced loan officers at Navy Federal can help you understand the current rate environment and the factors influencing your personal rates. Explore our mortgage options so you can purchase a home with confidence.